Like scheduling biannual visits to the dentist, it’s something most of us know we should be doing but aren’t: planning our financial future. The reason so many of us shy away from creating even a rudimentary plan that could guide us toward our next financial goalpost? Financial planning sounds a heck of a lot more complicated than it actually is.
We’re in good company: The majority of people are financially unprepared
Before we get to the heart of the matter, a glimpse of reality first. Northwestern Mutual released the results of a survey they conducted on over 5,000 adults in the U.S., ages 18 and older, in 2015. According to the study, 58 percent of Americans believe they need to work on their financial planning. Yet only 34 percent of people have created a real financial plan.
Where do you fall on the spectrum? Depending on your age and stage of life, financial planning may be a topic that has come more recently to the forefront.
Compounding on the Northwestern Mutual survey results, the American Institute of CPAs released a similar survey about our financial planning habits, also in 2015. One of the biggest concerns among Americans, even among those with a high net worth, is the fear of running out of money during retirement. More than half of the CPA financial planners surveyed, at 57 percent, said outliving retirement money was a top concern for their clients.
Financial planning made easy: Start with your mortgage
If these fears and financial woes sound familiar, you may be in desperate need of a real-world financial plan. To get from point A to point B, you first have to know where you want to go – and then figure out how to get there.
Begin here: Vocalize your ultimate financial goal, and then type it or write it down on paper. You want to set a realistic financial goal that you can reach within a few months or years. This may include setting aside ample retirement funds for the future. For most people, however, this goal will hinge on buying a house or paying off a mortgage – one of the biggest financial decisions you’ll ever make.
Once you have a clear view of the big picture, you can use these four proactive planning tips to gain control of your finances:
- Break down your goal further. You didn’t think you were going to get off that easy, did you? This is the step where you check and cross-check your financial goal to make sure that it is smart, profitable, and achievable. Examine your goal, research it, and start moving toward it. We recommend taking advantage of the free financial planning tools on Investor.gov, as well as using a money management app like Mint or Wally. If buying a new home or refinancing is on your radar, this will be a major component in your financial goal-setting.
- Lay the foundation. Let’s say you’re thinking about buying a house. In that case, you’re going to need to take an actionable step to lay the groundwork for your financial plan: getting prequalified for a home loan first. Cornerstone Home Lending, Inc., has a free LoanFly app you can use to get the party started. Borrowers can get prequalified, request a mortgage rate, and calculate a monthly mortgage payment, all using one app. Considering that your mortgage may be one of your largest monthly bills for the indefinite future, this app can help you better understand your home loan as you flesh out your household budget.
- Decide on a number. This is the number that you are going to need to plug into your financial plan, whether it’s for a down payment for a new home or for retirement. If you have any confusion about this magic number, you may need to meet with your accountant, retirement planner, or lender. Your mortgage lender can tell you if a larger or smaller down payment is right for you, based on the current state of your finances and the loan products you’re eligible for. Once you have this number in mind, you can start routing a set amount into your savings account each month to reach your bigger financial goal.
- Improve your financial hygiene. Just like your physical health, staying in good financial health is all about the healthy choices you make each day. Now you’ve got a basic financial plan that centers around a big-ticket goal for the future. This is the time when you keep that plan in motion. While almost any financial expert will tell you that it’s critical to pay your bills on time each month, financial planners also advocate creating good money-management habits. Start by setting aside 10 percent of your monthly earnings. Decide on a retirement age, if you haven’t already. Consider how much money you may save for your children’s future. At the very least, automate money into an emergency account that will equal 3 to 6 months of your living expenses.
If you’re having a hard time getting a financial plan in place, or getting these healthy habits to stick, there’s no sense in spinning your wheels. We recommend meeting with a financial advisor and consulting with your lender whenever you have questions. Making a financial plan requires taking actionable steps, and it’s something you don’t have to do on your own.
For educational purposes only. Please contact your qualified professional for specific guidance.
Sources are deemed reliable but not guaranteed.